Private pension holders face rough ride ahead

Most people are by now very well aware of the immediate and the longer-term problems and challenges facing the Irish economy.

They include the fundamental imbalances in the public finances, the unsustainable stock of government debt, the personal debt crisis, and the level of unemployment in general.

All of these problems are fully appreciated by most people, but a lot less seems to be known and understood about the imminent pension crisis.

This is understandable, because there is a total dearth of qualitative information about the nature of pension coverage.

It is estimated that just over 50% of workers aged over 25 have personal pension coverage, but we know a lot less about the quality of the coverage.

The realities facing those who will be forced to rely on private pensions is stark. Defined benefit schemes, which in theory pay a certain percentage of final salary on retirement, are going the way of the dinosaur. It is estimated that around 80% of defined benefit pension schemes are seriously under water, in the sense that they do not have sufficient funding to pay future pension liabilities.

Not surprisingly in the current economic climate, many companies either cannot afford or are not willing to make up the shortfall. This means that future pensioners who believe they will receive defined benefit pensions may not do so.

This means that more and more workers will be forced to rely on defined contribution schemes, which means that the pension you get on retirement will depend on how much you put in and how the fund performs over time. In other words, more and more responsibility will be placed on the shoulders of the worker.

The big problem is that many pension funds have performed abysmally in recent years, with for example, the average managed pension fund delivering annualised returns of just 3.43% over the past 15 years, which is just ahead of average consumer price inflation of 2.6% over the same period.

While there are many different types of pension products available, apart from the bog-standard managed pension fund, the overall investment performance has been pretty dismal and has not inspired any degree of confidence.

Of course the report this week from the Department of Social Protection on the fees charged by fund managers is also quite disturbing. It estimates that the value of a pension fund will be 12% to 31% poorer than it would otherwise be over a 30-year period because of the impact of industry charges.

In addition to fees and performance, another big issue for pension holders is that the Government has committed to raiding pension funds with the imposition of a 0.6% “temporary” levy on private pension funds every year between 2011 and 2014. The levy is applied to the value of the fund as at the end of June each year. It is estimated that this raised €460m in 2011. Given the hunger of Government and the cowardice that prevents any consideration of the Croke Park deal, this “temporary” levy could very easily become “permanent”.

These are clearly not easy times for private pension holders and it is now looking likely that tax relief on pension contributions will be slashed to the lower rate of tax in the upcoming budget. If this were to happen, the benefit of paying into one’s pension would be virtually wiped away.

Anything that damages pension provision today will store serious problems in the future as the “retiring poor” flood into the economy, placing a greater financial burden on the State.

A bit of long-term strategic thinking would not go amiss with our policymakers, but the more I see, the less convinced I am they are capable of such a thing.